How the JPMorgan deal could curtail credit

The Justice Department's potential $13 billion settlement with JPMorgan may go a long way toward appeasing consumers' anger at big banks for the financial crisis, but it probably won't help those same consumers get a mortgage. In fact, it may make it harder.

"In my eyes, this tightens credit," said Paul Miller of FBR. "That is the problem with these government actions to make everyone pay."

Mortgage credit is already exceedingly tight. Thirty-three percent of all people who bought a home in September paid in cash, according to a report Monday from the National Association of Realtors. That share has historically been well below 10 percent.

"This is just going to make banks more conservative," said Jaret Seiberg of Guggenheim Securities. "If they're going to go after you for helping the government out in taking over distressed institutions in time of crisis, then why do you have any confidence that they're not going to go after you for some technical violations of the dozens of new rules coming down?"

New mortgage rules are scheduled to go into effect Jan. 1 that will further restrict lending. These include requirements that a lender show that the borrower has the ability to repay the loan, as well as restrictions on how much mortgage debt a borrower can have in relation to income.

"The bottom line is that there is nothing in the market these days suggesting now is the time to significantly ease underwriting standards," said Guy Cecala, CEO at Inside Mortgage Finance. "A combination of big settlements, new mortgage regulations and continuing GSE [Fannie Mae and Freddie Mac] buyback risk all indicate any easing of underwriting will be slow. The only factor really pushing for looser underwriting is declining mortgage originations and the resulting increase in competition. But it seems to be happening very slowly."

Since the housing crash, mortgage volume has been driven largely by refinancings. Those have slowed dramatically as mortgage rates jumped a full percentage point from May to July and have stayed higher ever since.

Refinancing at low rates has helped a lot of borrowers—even those who owe more than their homes are worth—to avoid default and foreclosure. Banks also have been forgiving billions of dollars in mortgage principal, either on their own or in compliance with the $25 billion mortgage servicing settlement with state attorneys general over foreclosure processing fraud, or so-called robo-signing.

The potential settlement with JPMorgan reportedly includes $4 billion in consumer relief. Sources close to the matter said details are still being worked out but that the relief could come in the form of additional mortgage principal forgiveness, made in direct payments to borrowers.

"The government always likes to be seen as helping the consumer, who also happens to be the voter, so in this case you have a lot upset voters. ... These kinds of settlements have been the only way to target relief to them," said Seiberg at Guggenheim.

Writing down mortgage principal could hurt mortgage bond investors by lessening bond values. Those are the some of the same investors allegedly misled by the banks about the quality of the loans backing the bonds.